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Tag: advertising

Out of all the tech companies that I have written about so far, Google is far and away my favorite, and one that I always have wanted to work at (at some margin, I still do).

It’s just – and this is a personal thing, may not work for everybody – cool.

The only reason I say this at the outset is to make sure that you’re aware of my biases!

Here we go:

I often ask this question in classes I teach in microeconomics, or introductory economics:

“What is Google’s business?”

The default answer is almost always “search”. At which point of time, I have a follow-up question: identify for me one person who has paid Google to run a search.

In fact, if anything, Google seems to go out of its way to keep Google search free. And if running a search is not to be paid for, it can’t be much of a business, right?

So what is Google’s business?

But suppose we say that Google is primarily an advertising company. That changes things. The U.S. search engine advertising market is $17 billion annually. Online advertising is $37 billion annually. The entire US advertising market is $150 billion. And global advertising is a $495 billion market. So even if Google completely monopolized US search engine advertising, it would just own 3.4% of the global advertising market. From this angle, Google looks like a small player in a competitive world.

What if we frame Google as a multifaceted technology company instead? This seems reasonable enough; in addition to its search engine, Google makes dozens of other software products, not to mention robotic cars, Android phones, and wearable computers. But 95% of Google’s revenue comes from search advertising; its other products generated just $2.35 billion in 2012, and its consumer tech products are a mere fraction of that.

That’s Peter Thiel, in From Zero to One. The context in which he wrote this apart, what matters is the fact that he’s absolutely right about the fact that Google earns a vast amount of its revenue from advertising, not running searches.

But what are advertisers paying money to Google for? To provide digital real estate, in which ads can be shown, and the impact of these ads can be measured better than ever before in history. And advertisers are willing to pay because Google understands its users better than anybody else. Why does Google understand its users better than anybody else?

Because we have some combination of the following as part and parcel of our daily lives

But here’s the thing: we don’t pay for any of these. By that logic, we aren’t Google’s customers. But advertisers areGoogle’s customers and that makes us Google’s… products.

So here is the kicker. Android, as well as Chrome and Chrome OS for that matter, are not “products” in the classic business sense. They have no plan to become their own “economic castles.” Rather they are very expensive and very aggressive “moats,” funded by the height and magnitude of Google’s castle. Google’s aim is defensive not offensive. They are not trying to make a profit on Android or Chrome. They want to take any layer that lives between themselves and the consumer and make it free (or even less than free). Because these layers are basically software products with no variable costs, this is a very viable defensive strategy. In essence, they are not just building a moat; Google is also scorching the earth for 250 miles around the outside of the castle to ensure no one can approach it. And best I can tell, they are doing a damn good job of it.

All those products that I listed above? They weren’t build to generate revenue for Google (although that may be changing now), they were built to make sure that Google continued to attract, and track, eyeballs.

Google dominates every aspect of this cycle, and every announcement at IO accrued to it:

On the signal side:

Their mobile apps are both the best, and the most popular, and they work best with a Google+ account

Their browser is the best, and the most popular, and it works best with a Google+ account

Their maps are the best, and the most popular, and they work best with a Google+ account

Their video website (YouTube) is the best, and the most popular, and it works best with a Google+ account

Their mail service (GMail) is the best, and the most popular, and is a Google+ account

And they simply own online advertising, with the best, and most popular, search ads, 3rd-party ads, and display ads.

But for the longest time, Google was a hammer in search of a nail.

Google was by far and away the best search engine in the late 1990’s – it wasn’t even close. But – and it was a big, painful “but” – how to make money? Enter economics, Google style:

Googlenomics actually comes in two flavors: macro and micro. The macroeconomic side involves some of the company’s seemingly altruistic behavior, which often baffles observers. Why does Google give away products like its browser, its apps, and the Android operating system for mobile phones? Anything that increases Internet use ultimately enriches Google, Varian says. And since using the Web without using Google is like dining at In-N-Out without ordering a hamburger, more eyeballs on the Web lead inexorably to more ad sales for Google.

The microeconomics of Google is more complicated. Selling ads doesn’t generate only profits; it also generates torrents of data about users’ tastes and habits, data that Google then sifts and processes in order to predict future consumer behavior, find ways to improve its products, and sell more ads. This is the heart and soul of Googlenomics. It’s a system of constant self-analysis: a data-fueled feedback loop that defines not only Google’s future but the future of anyone who does business online.

And so Google has become a company that has changed how to think about business in tech: give away cool products for (nearly) free, in exchange for your information, that is then sold on to advertisers.

A useful way to think about Google is that you are Google’s product, not its customer. Think of it this way: if you aren’t paying for something, how can you possibly be a customer?

Facebook and Google both have the same model: ad-driven.

There are many, many things to unpack as a consequence of thinking about this business model, and we’ll get to all of these things in the weeks to come.